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Payday Loans are Just Bad News

If Visa offered you a credit card with an annual percentage rate of 391%, would you take it?

It sounds like a joke, but to the recipients of one of the most sinister and underhanded lending practices in the marketplace, it's truly no laughing matter.

The typical story goes something like this. Jim is strapped for cash, several of his bills are due (or past due), and payday isn't for another week. So rather than get hit with late fees or hurt his credit any worse than it already is, Jim decides to seek out what is known as a payday loan. He figures, "it's just like an advance on money that's coming my way anyway, right? Why not?"

So Jim takes a walk to his local payday loan center and writes a postdated check for $575 for a $500 loan. Two weeks from now, he'll have to allow the check to be cashed, pay back the full amount of the check by some other means (such as cash), or pay another fee to extend the loan.

Can you guess what $75 on a two-week loan for $500 works out to be in annual interest? That's right, 391% APR-- and what's worse, that's actually the low end of the spectrum when it comes to these types of loans. Payday loans have been known to reach upwards of 700+% APR (often the highest rates come from online lenders) with averages usually in the four to five hundreds. As an example, California's average is 460%.

Once is Rarely Enough

If Jim only had to do this kind of thing once, it might be painful but at least it would be over quickly. The problem, however, is that using this kind of loan often creates a cycle of debt that can't be easily undone. The average borrower spends $793 to pay off a $325 loan because he or she ends up needing to take out more payday loans just to pay off the original, either because of a lack of funds available or because two weeks just isn't enough time to regroup.

According to the Washington State Department of Financial Institutions, one in four payday borrowers in that state took out loans between 10 and 19 times a year.

The Very Definition of Usury

Payday loans often fall directly under the definition of usury, which is the act of lending money at an unreasonably high interest rate, as dictated by the state. Now, of course, many states have allowed payday loans, or payday lenders have used lending loopholes to their advantage, but certainly a loan with an APR in the three-digit realm can't be considered anything except "unreasonable."

As an interesting point of reference, the Roman Empire had a 12% cap on interest rates. The ancient Chinese had a 36% cap. The American colonies had caps between five and 12%. And between 1900 and the late 1970's, most U.S. states had usury caps between 18 and 42%. So historically we are way over the limit and into what amounts to legalized loan sharking.

What Choice Do You Have?

The argument for payday loans is that they serve competition and may be the only alternative for people with severe credit problems. For those people, these loans could be the only thing standing in the way of bouncing checks or having to pawn their personal items. But if you know someone like Jim or have been tempted to take out a payday loan yourself, consider these alternatives:

A small loan from your credit union or small loan company.

A loan from family or friends.

An advance on pay from your employer.

A cash advance on a credit card (though it may have a higher interest rate than your other sources of funds).

A local, community-based organization may make small business loans to individuals.

Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge, or a higher annual interest rate.

Try working out a debt repayment plan with creditors and developing a budget.

Find out if you have, or can get, overdraft protection on your checking account. The fees can be high but may still be lower than those of payday loans.

Contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers and these services are available at little or no cost.

No matter what you choose, it's extremely important to shop carefully, compare offers, and look for the option with the lowest APR.

Buyers Beware

Between 2000 and 2004, the number of payday lender locations skyrocketed from 10,000 to 22,000. As of last month, University of Utah law professor Christopher Peterson said, nationally, there are now more payday lenders than McDonalds, Burger King, J.C. Penneys and Target stores combined.

The numbers are scary and several consumer watchdog organizations have released strong warnings against payday loans. The FTC posted a "Consumer Alert," the Consumer Federation of America set up www.paydayloaninfo.org as an educational resource, the United States Defense Department has a program in place that warns military service personnel against them, and our nation's capitol has effectively outlawed the practice by capping the interest rate at 24% (Payday Loan Consumer Protection Act).

The moral of the story? Stay away from payday loans. No matter how bad your financial troubles may seem now, they can always be worse.

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All Comments

For the folks who use payday loans a few times a year....next time you pay one off, open an account at a different bank, and for the following 2-3 paychecks pretend you still have the payday loan, but make the "payment" to yourself in that savings account . Next time you need money you can "borrow" at least part of what you need from your personal "payday loan account" , pay yourself the fees, and by the end of the year you'll be a paycheck ahead & should never need a payday loan again.

For most people who do payday loans these are predator loans. some advice bring up your annual free credit reports dispute in accuracys and get you two easy to get credit cards that don;t require annual fees or deposits. capital one student and barclay rewards are two good choices for rebuilding. find out with your score first if you qualify if not then get secure ones. at least then your using something that will actually help rebuild your credit. pay them off about two weeks after used. won't cost you and you have credit building at same time. regardless of what you been told try not to carry balance on your credit cards but use for stuff you would generally buy each month and keep utilization between 10 and 20 percent margin

I took out payday loans for about a year, I was doing it because I wasn't making enough to make my bills. They are right it is a vicious circle. I ended up defaulting on a loan. Sixteen months after I defaulted, they sent my check through my account again. The bank honored it and I am now paying overdrawn fees to my bank. The trouble that I am going through now could have been prevented, if I had found someother way to handle my finances. SO don't take out loans. So you can be prevented from my problems.

I know this is true, I did get one once and I couldn't stop with one because I had to pay it out of my paycheck and I didn't have enough for the rest of my bills and had to borrow again and it was a vicious cycle. I was lucky enough to have a good boss at work to help me get out of the problem. It is a big bad thing to get in to.

I'm with you people! These companies are nothing more than legalized LOANSHARKS! I took out a loan asking for only $300.00. They generously gave me $500.00 instead. (lowest they could lend & all that crap) . I ended up paying them a thousand back & had I not had the finances it would have been more, Much more. That taught me a lesson.I WILL NEVER DO THAT AGAIN! These companies remind me of organizes crime sharks & they need to be seen that way no matter what star has his name on them. They lost this customer!

Thank you for the educational information, I have no idea what the interest rate was at those places. I will never use them but it was good to be inform that will help me to help some of my friends who I know they use these tipe of loan

I was in a bind and needed $500 quick so I used a payday loan. I had to pay back $612 and I did it out of my next check. It didn't hurt me, I planned for it, I rebounded quick. I bank with Chase and they don't do cash advances or anything and I needed something that wouldn't hit my credit report. Sometimes a payday loan is necessary- you have to have the funds from your next check immediately. As long as you are responsible I think it can be a good option when used sparingly and wisely.

I'm reminded of these lyrics from an old country song dealing with divorce:

"Well I know that it sounds so funny - but it hurts too much to laugh,

She got the goldmine, and I got the shaft."

A couple of years before I divorced my ex-wife, I got into the payday-loan trap myself. But it didn't take me long to realize that the only thing my payday loans were for was to "bail out" my ex. My own credit usage was pretty ordinary. How I got out of the payday-loan trap is pretty simple. I stopped bailing her out about 6 months prior to the divorce. And by the time the divorce became legal, my payday-loan usage was zero.

I think a few people on here are out of touch with reality. First of all, yes, the APR does matter. If it was as simple as only paying $25 to borrow $100 these companies wouldn't be doing such great business. Most people do not borrow just $100. They borrow the maximum that they can (in my state $500). And then they end up not paying it back on the original due date because $125 + the original $500 is hard to come up with. Especially if you had an unexpected expense pop up...which is why most of American's take out payday loans. So that $125 finance charge every two weeks really adds up and takes a huge chunk out of our budgets. Before you know it your $500 loan just cost you $1000+.

So, would you rather pay a $30 late fee or the $100's in finance fees?

Most people only do this as a last option. They have to have the money. It's not likely that EVERYONE who gets a payday doesn't keep good track of their finances. We had to take one out last year. First my husband's place of employment caught on fire so he was out of work for 6 weeks. Even with unemployment benefits he would have only brought home 1/3 of his pay. But we had enough in savings to get us through that. One week after he returned to work I got laid off of my job for "lack of production orders." And again, my unemployment wasn't nearly close to what my bring home was. So, in order to make our mortgage payment a few weeks later, we took out a payday loan. But I did my homework. I found a payday loan that gave us the first "term" finance free. So that $300 we borrowed, plus the fees, cost us $300 to payback.

Another option for people is to go through your bank. When I had a US Bank account they offered "advances" up to $500 and only charged a 10% flat fee. So even if it took us 6 weeks to pay back the $500 our total finance charge was only $50. People just need to do the research before they jump into anything.

Payday loans are a necessity some times but people should never go over what they can pay back. If you need to go by until you next paycheck comes you need to do your math. Sometimes if you call the company you can pay half of capital and the interest rate will be less on the second payment. I was force to take one on December and it cost me a big chunk to pay it back but I did. If I have to get another one again I will do just what I need until my paycheck comes. When you have 2 toddlers and most of your family members are out of work you may need to get one small payday loan to eat!

I have used payday loans for many years one particular reason. There is no hassle involved. I don't have to wait any number of days, I don't get my credit checked, I don't hurt my credit score, and its a necessity at times from odd mishaps that happen in life. If you are aware of what you can afford and handle, then there should be no issues with borrowing from a payday loan business. Like with any money management issue, know your limits!

I have used payday loans for years but the reality is you have to know your limits... I understood what i was geting myself into and i never had any problems, but you have just plan ignorant people that don't care about anything at the moment other than getting money in thier hands and never once think about how it is to be paid back... Those are the fools..

Here in Ohio we passed a law last November to cut the interest rate on the most popular payday loans WAY down. They can still finangle ridiculous fees and things with a few remaining loopholes but most people will not get those kinds of loans. The payday cash industry went ballistic when the referendum went on the ballot and threatened to pull out of the state (only they phrased it as "will not be able to operate our businesses under the new law"--yeah right, "unable," my rear end), but so far I'm still seeing them around town. If a lender couldn't make money on 20 or 30 percent interest then credit cards would have tanked as a business model a LONG time ago.

There really needs to be a cap placed on these type of loans, as these companies are truly taking advantage of those who can least afford it. 20% seems most reasonable to me; but at the most 30% interest should be the legal cap. No wonder these places are popping up everywhere... what's next? these lenders holding a ballbat knocking on the door to collect???

Credit is part of the growing economy. We live and we use of it. It serves as our financial assistance to survive in the challenging world particularly in the economy as well. New Hampshire education officials are pushing to have some high-schoolers graduate by 10th grade, which means young people will be out into the real world of bills, payday loans, and responsibility a whole lot sooner. The plan is to administer state board exams to sophomores; the students that pass will be allowed to move on to community or technical colleges, foregoing the last two years of high school. You should read the full article to formulate your own opinion, but as a young person and former college student, I don’t know if 16 year-olds are ready to handle the stresses of the real world. There is still so much learning that occurs in the last two years of high school. I’m not talking about the reading and writing; I’m talking about high-schoolers learning how to function in different social situations and learning responsibility. Most 16 year-olds wouldn’t be able to handle all the scholastic and financial responsibility associated with college. I was barely ready at 18. Kids don’t need to grow up any faster; it wouldn’t even be legal for these younger graduates to apply for payday loans to help pay for books or overload credits. Click to read more on ">Personal Loans

Banks are not predators

Helpful to 1 out of 1 people

It is not a predatory practice to charge an overdraft fee. People should keep better track of their own finances. Overdraft fees are a penalty for charging too much on your card when you don't have that money available.